Commenting on the decision, Colin Bell, Operations Director at InterBay, said: “This months rate rise quickly became necessary due to excessive activity in the service sector at the end of 2006 into this month. The economy is over heating at present and the rate rise decision by the MPC is designed to try and slow this down.
“Property-wise, the commercial sector has had immense growth over the last three years and whilst I think it will continue to grow in 2007, it could be muted with increasing rates potentially decreasing new investment. However, the commercial remortgaging market will continue to be strong, as business owners look to release tied up capital. This will be a half year of attempts to cool down the economy.”
John Goodfellow, chief executive of Skipton Building Society, added: "It was previously thought that, were the rate to move, February would be the month it would happen. However, the strength of economic data released during December - especially the high inflation numbers for both consumer price inflation and average earnings - and strong housing market indicators, mean that today’s announcement comes as no surprise. It will be very interesting to read the minutes of this meeting, to see whether they reveal the MPC in an overall hawkish mood, with the implication of further increases, or if this is simply a one-off move and rates will remain at 5.25% for a while yet.
"As the Society with the lowest interest margin, we are keen to ensure that both investors and borrowers benefit from our competitive advantage, so we are currently reviewing our options to ensure a fair balance of rates across our product range. We hope to make a decision regarding Skipton Building Society’s rates next week. It is worth pointing out that any delay in making possible increases to lending rates is in the interest of our borrowers, although those with both mortgages and investments tracking the base rate will see their rates reflect the full rise, with effect from 26 January."
Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, said: "A rate rise to 5.25 per cent at the start of the year has caught the market by surprise, particularly following a period of heavy consumer spending during the festive season. This rise comes a month or two earlier than widely expected as many were anticipating a rise in the first quarter of 2007, but not as early as this.
"An increase in rates will signal a tightening of belts for some. Money markets are expecting a further rise in the first half of 2007 and this will impact on the pricing of fixed and base rate tracker mortgages. For those on the look out for a new fixed rate deal, it would be advisable to secure one now rather than adopt a 'wait and see' approach. There are also still a number of great value base rate trackers available which are cheaper than short-term fixed rates for those whose financial circumstances are more flexible and able to withstand further rises.
"It is widely anticipated that interest rates will not rise to more than 5.5 per cent in 2007, so homeowners should bear this in mind and ensure they will be able to withstand any future rises."
